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WACC and target weights After careful analysis Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table. Source of capital Target market value weight Long-term debt 30% Preferred stock 15 Common stock equity 55 Total 100% The cost of debt is estimated to be 7.2%; the cost of preferred stock is estimated to be 13.5%; the cost of retained earnings is estimated to be 16. %; and the cost of new common stock is estimated to be 18%. All of these are after-tax rates. The company debt represents 25%, the preferred stock represents 10%, and the common stock equity represents 65% of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earning available and does not expect to sell any new common stock.
a. Calculate the weighted average cost of capital on the basis of historical market value weights.
b. Calculate the weighted average cost of capital on the basis of target market value weights.
c. Compare the answers obtained in parts a and b.
A project has a life of 10 years, and no salvage value. The firm uses an interst rate of 12% to evaluate engineering projects. The project has an uncertain first cost and net revenue. First Cost P Net Revenue P -- $300,000 0.2 $70,000 0.3 400,000 ..
Consider an economy with two separate regions: A and B. There are 100 million workers in total who supply their labor inelastically. The demand for labor (in millions) in region A is EA = ??100 - 15 wA and in region B it is EB= 100 - 15 wB.
At a product price of $ 40, how many units will this firm produce in the short-run b)At a product price of $ 50, how many units will this firm produce in the short-run c) At a product price of $ 60, how many units will this firm produce in the short..
ADVANCED ANALYSIS Currently, at a price of $1 each, 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit-elastic (Es = 1.0).
If the costs are expected to increase by $250 each year for the next 4 years (i .e., through year 5), what is the equivalent annual worth of the costs (years 1 through 5) at an interest rate of 18% per year? Please use P=A(P/A, i, n) or whatever y..
Computers are sold competitively. Each computer, such as a Dell or Compaq, contains an operating system, such as Windows, that is pre-loaded on the computer. Suppose that the price of computers is $2000, and the price of an operating system is $10..
Abby consumes only apples. In year1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green apples. a. Compute a consumer price index for apples f..
he company is proposing to build a $10-million power plant to burn its waste as fuel, thereby saving $2.8 million a year in coal purchases. Company engineers have determined that the waste-burning plant will be environmentally sound.
Define optimistic, most likelys, and pestimistic scenarios buy using both optimistic, both most likely and both pestimistic estimates. Use a life of 4 years as the most likey value. What is the present worth for each scenario
Suppose that the reserve requirement is 3% on the first 30 million of checkable deposits and 10% on the checkable deposits in excess of 30 million. (Amounts on the balance sheet are in millions of $) Assets- Reserves 15.9, Loans 150.0, Securities 3..
you have operating and maintenance costs that start at $15,000 the first year and increase by $2,000 per year thereafter. assume that the salvage value at the end of five years is $9,000 and interest rate is 12%. Determine the equivalent annual co..
One alternative way (from the formula on p. 419) to calculate the total change in money supply when the Fed injects money into the economy or takes away money from the economy is the amount of money injected or taken away by the Fed times the mone..
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